June 23, 1997
Analysis Finds
Wealthiest Fifth of Population Would Receive
87% of Benefits From House Tax and Entitlement Changes
In an analysis of the effects on different income groups of the tax and entitlement changes that various committees of the House of Representatives approved this month, the Center on Budget and Policy Priorities has found that the top 20 percent of the U.S. population would receive 87 percent of the net benefits these changes would provide when the changes are fully effective. The bottom 60 percent of the population — numbering more than 160 million people — would share four percent of the net benefits, the study finds.
The Center worked in collaboration with Citizens for Tax Justice in preparing the study. CTJ analyzed the effects of the tax changes on different income groups. The Center analyzed the effects of the entitlement changes and prepared the report.
The Impact on Families in Different Income Categories of the Tax and Entitlement Changes Approved by House Committees also examines the combined effects of last year's reconciliation law and the tax and entitlement provisions that constitute this year's reconciliation legislation. Last year's law made major changes in programs for the poor. The analysis finds that the combined effect of this year's and last year's legislation would be to reduce the after-tax incomes of families in the poorest 20 percent of the population an average of $420, while increasing the after-tax income of those in the most affluent 20 percent of the population by more than $2,500.
The after-tax income of the wealthiest one percent of the population would rise an average of $27,000 as a result of the legislation, the study finds.
The study's findings regarding the extent to which the wealthiest Americans would benefit from the tax cuts indicate that these individuals would receive larger tax cuts than the Treasury Department estimated in its preliminary assessment of the legislation. The difference stems largely from two factors. This study covers the effects of the cut the House Ways and Means Committee approved in the estate tax, a change that would affect the estates of the wealthiest one percent to two percent of individuals who die each year. The Treasury analysis does not include the effects of the estate tax provisions. In addition, this study examines the effects of capital gains indexing when that tax cut reaches its full dimensions. The Treasury analysis examines the effects of indexing in 2007, a point at which this tax cut will have reached only about half of its ultimate size.
The new study is unique among analyses of the effects of the pending legislation on different income groups because it examines the net effects of the tax and the entitlement changes, rather than the effects only of the tax cuts. The study is similar in approach to the Congressional Budget Office's analysis of the effects on different income groups of the tax and entitlement changes in the 1990 budget agreement and OMB's analysis of the effects of the tax and budget cut provisions of the 1995 reconciliation bill.
The study uses as its backbone new CBO data on how income is distributed across the income spectrum. These CBO data show that high-income families — the group that would benefit the most from the pending legislation — constitute the income group that has reaped the largest income gains since the late 1970's, while low-income families — the group whose average income will fall as a result of the combined effect of this year's and last year's legislation — make up the group for which income has fallen most sharply over recent decades.
The new CBO data show that from 1977 to 1994, the after-tax income of the wealthiest one percent of families grew an average of 72 percent, after adjusting for inflation. The 20 percent of families in the middle of the income spectrum, however, experienced a slight decrease in average after-tax income, while the after-tax income of the poorest 20 percent of families fell an average of 16 percent.
Gains for Middle Class Would be Modest
The study also finds that for middle-income families, the increase in after-tax income the legislation would produce would be modest. Families in all income categories except the top 20 percent of the income distribution would either receive no net income gain on average or receive an average gain amounting to less than one percent of their income.
The study finds that the total after-tax income of the bottom 80 percent of the population — which includes 215 million people — would rise a total of $8 billion. Meanwhile, the after-tax income of the top 20 percent of the population would increase $59 billion.
These figures overstate the gains that middle-class families would receive, the study explains, because the analysis does not include the effects on family income of the large cuts the budget agreement requires in coming years in non-entitlement programs. Under the agreement, reductions in non-defense programs that are not entitlements reach nearly $30 billion a year by 2002.(1) These reductions are used in part to pay for the tax cuts. But because the budget agreement does not specify which non-entitlement programs will be reduced or by how much, the effects of these cuts on family income can not be estimated. The omission of the cuts in this part of the budget from the analysis is significant, because non-entitlement programs that provide benefits which directly affect family income — such as child care subsidies, rent subsidies, and assistance to low-income families with high heating bills — primarily affect middle- and low-income families.
Rangel Tax Plan Would Have Different Distributional Effects
The study found that a rival tax proposal which Representative Charles Rangel offered unsuccessfully in the Ways and Means Committee and plans to offer again on the House floor would have very different effects than the Ways and Means tax plan. When the provisions of both tax plans took full effect, the 60 percent of the population in the middle of the income spectrum would receive 70 percent of the tax cuts the Rangel plan would provide, as compared to 21 percent of the tax cuts the Ways and Means plan would hand out.
The Rangel plan would provide 15 percent of its tax cuts to the top 20 percent of the population. The Ways and Means plan would provide 80 percent of its tax cut benefits to this group.
The study found that the bottom 60 percent of the population would get larger average tax cuts under the Rangel plan than under the Ways and Means proposal, even though the Rangel plan would cost less than half as much as the Ways and Means proposal when both plans reached their full cost level. The Rangel plan provides larger average tax cuts to the majority of the population while costing substantially less because it provides sharply smaller tax cuts to the most affluent 20 percent of the population.
Other Findings
Other findings from the study include:
The burdens of the cuts this year's House legislation makes in entitlement programs, which help to pay for these tax cuts (and also help to bring the budget into balance in 2002) are broadly shared. But when measured as a percentage of income, these reductions affect those on the lower parts of the income scale to a greater extent than those on the higher parts of the scale.
The poorest 20 percent of the population, which has 4.5 percent of the nation's after-tax income, would receive no average net gain from this year's legislation after bearing 65 percent of the reductions contained in last year's legislation. The top 20 percent of the population, which would benefit the most from this year's legislation, bore none of last year's cuts.
If one combines the effects of last year's reconciliation law with the effects of the pending House tax and entitlement proposals, the next-to-the-bottom fifth of the population would suffer a net income loss, along with the bottom fifth. Families in the next-to-the-bottom fifth would lose an average of $135.
Note on Methodology
Citizens for Tax Justice estimated the effects of the tax proposals on different income groups, using the Institute on Taxation and Economic Policy's Microsimulation Tax Model. This model is based on a large sample of tax returns, Census data, and other data and is similar to the tax model the Treasury Department and the Joint Committee on Taxation use. Historically, the estimates this model generates have been similar to those the Treasury Department produces.
The estimates of the effect of the entitlement changes on different income groups were estimated by the Center, based upon the Urban Institute's TRIM model. The TRIM model has historically produced estimates similar to estimates the Congressional Budget Office produces.
End Note
1. This and all figures in the study are expressed in 1998 dollars.
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